Question

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should ____

(A) Decrease
(B) Increase, then decrease
(C) Not change
(D) Increase

Answer 1

The correct answer is D) "increase"

Step-by-step explanation:

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should Increase. As income increases, the demand for money raises up. This increase in demand raises the equilibrium interest rate.